by Glenn Cheney

London - The International Accounting Standards Board has proposed a standard on business acquisitions and mergers that would eradicate from the face of the earth the pooling-of-interests method of accounting for such business combinations.

Such an extinction isn’t as radical as it seems. The purchase method of accounting for business combinations has been gradually replacing the pooling method, whose use in the United States was eliminated thanks to Financial Accounting Standards Board Statements 141 and 142.

A few countries, most significantly Japan, still permit pooling in instances of "mergers of equals," that is, mergers in which it is not easily determined who is acquiring whom. In a few recent corporate mergers, however, the definition of "equals" has been stretched beyond credibility, and some say that complete elimination of the pooling method will prevent such abuses.

The IASB proposal would bring the international standard close to the U.S. standards.

"The IASB exposure draft is very consistent with a lot of the decisions reached by FASB, not just in Statements 141 and 142, but in the ongoing purchase method procedures project," said Brian Degano, FASB practice fellow. "The two boards are moving in the same direction on many big-picture items."

The IASB ED shows a significant difference from the FASB standard in proposing that costs expected to be incurred in a merger, including requisite restructuring costs, would be treated as a post-combination expense unless the acquired entity has a pre-existing liability for restructuring its activities. Current international and U.S. generally accepted accounting principles allow the restructuring cost to be included in the cost of the acquisition.

The IASB proposal converges with U.S. standards in requiring that intangible assets be recognized separately from goodwill if they are separable from contractual or other legal rights. Identifiable assets acquired and liabilities assumed would be measured at fair value. There would be no amortization of goodwill or intangible assets with indefinite useful lives. Rather, they would be tested for impairment annually, or more frequently if events indicate possible impairment.

IASB member Tony Cope said there are "no huge conceptual differences" between the U.S. standards and the IASB proposal. He expects, however, that U.S. companies may express concern about the change in treatment of restructuring cost and about new disclosures that would be required in tests for impairment of goodwill.

"There are some disclosures proposed that I’m sure some people will say are competitively disadvantageous," Cope said.

The Association for Investment Management and Research, one of the world’s largest defenders of investor interests, is reluctant to accept all the details of the proposal but is tentatively praising the proposal as a whole.

"At this point, having two models of accounting for business combinations just isn’t worth it for the relatively few instances of true mergers of equals," said Georgene Palacky, AIMR associate in professional standards and advocacy. "On the other hand, while non-amortization of goodwill and other intangibles also levels the playing field, many of us have concerns about the level of pressure that it puts on the impairment model as the be-all and end-all. How effective are impairment tests in picking up impairment on a timely and consistent basis? You can argue that straight-line amortization doesn’t do a job that’s any better in terms of allocating costs to the right period."

Palacky said that her association was still formulating a comment letter but that one area of concern was the accounting for in-process

research and development. The U.S. and international principles have similar approaches to identifying assets acquired in a business combination, but the principles diverge on R&D. The U.S. standard expenses in-process R&D. The IASB proposal would have in-process R&D recognized separately from goodwill if it meets the definition of an asset.

Mary Tokar, a partner with KPMG, is following international standards at the firm’s London office and is concerned about the emphasis put on impairment tests for the treatment of goodwill. "I think the big issue in international standards is about impairment, not amortization," Tokar said. "Does the proposal place too much stress on impairment? Not enough stress?"

The IASB proposal and FASB’s Statement 141 differ on their accounting for negative goodwill, but FASB has agreed to amend its standard to converge with the international standard if it is adopted as proposed. Both boards agree that when the assets bought are worth less than the purchase price, a gain on the purchases would be recorded. The IASB, however, proposes that the entire gain be taken into income immediately, while Statement 141 holds that the value of long-term assets would be reduced before determining the gain.

The boards are working together on second-stage projects that aim to iron out many of the differences in the two standards, including that of negative goodwill. They are also working on a joint project on application of the purchase method, the results of which may affect the application of various FASB statements dealing with business combinations. The IASB project also focuses on accounting for formations of joint ventures and business combinations involving entities under common control.

The IASB requests comments on its exposure draft by April 4, 2003.

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